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When you use the var keyword, a variable is declared local for the scope (The function). If you don't use var, and there is a non-local variable, then this is used instead. That's how most languages work.

The special thing about javascript is, that on top of this, it has lexical scope. Lexical scope is a lot less confusing, once you get used to it. Basically, the placement of the variables, in the code, determines scope: